Fed Statement: Highlights, Red Line

Ok, here comes the Fed. And you should enjoy this FOMC statement because it represents the outcome of the last meeting Janet Yellen will chair. So you know, maybe print it out and frame it for posterity in case the equity bubble she’s spent years presiding over crashes an burns under a relatively hawkish Powell.

The consensus is that this should be some semblance of upbeat as a way of both conveying confidence in the outlook (perhaps on the back of the growth prospects tied to the tax plan) and paving the way for Powell’s Fed to adopt a slightly more aggressive stance going forward.

Just to give you something to benchmark this against in terms of reality versus expectations, here’s a reminder about what Goldman said in their preview:

At Janet Yellen’s final FOMC meeting next week, we expect the FOMC to issue a generally upbeat post-meeting statement that includes an upgrade to the balance of risks and a slightly hawkish rewording of the inflation assessment. Taken together, we believe the tone of the statement will be consistent with a hike at the March meeting, barring a sharp weakening in economic conditions.

November headline and core PCE inflation rates were a few tenths above their respective summer lows (yoy). And based on the Q4 GDP report and on CPI and PPI source data, core PCE inflation has ended the year a quarter-point higher than its August bottom (we estimate +1.54% in December compared to +1.30% in August). Sequential inflation readings have similarly firmed. While core inflation remains below target and the recent firming has been gradual in nature, we think many Committee members will view the rebound as additional evidence that last year’s shortfall largely reflected temporary, idiosyncratic factors. Similarly, market-based inflation expectations have moved higher since the December meeting, and the 5Y/5Y measure monitored by the Fed reached 2.25% on Friday (see Exhibit 3).

Will the statement give everyone another excuse to sell Treasurys thus exacerbating the bond rout? Notably, yields rose on Wednesday after initially shaking off the expected increase in supply from the Treasury refunding announcement.

Or perhaps Yellen will leave on a dovish note, thus preserving the “slow and steady wins the race” meme for a while longer.

Let’s find out…

Summary

• FED: ECONOMY TO `WARRANT FURTHER GRADUAL INCREASES’ IN RATES
• FED: INFLATION TO RISE THIS YR, STABILIZE AROUND 2% MEDIUM-TERM
• Fed: inflation to rise this yr, stabilize around 2% medium-term
• Fed holds rates unch in unanimous vote; powell replacing yellen
• Fed: labor market continued to strengthen
• Fed: economic activity rising at solid rate, unemployment low
• Fed: gains in employment, spending, investment have been solid
• Fed: mkt-based inflation compensation gauges rose recent months
• Fed: survey-based inflation expectation gauges little changes
• Fed repeats risks to outlook appear roughly balanced

Redline 

"remain low" remains

— Heisenberg Report (@heisenbergrpt) January 31, 2018